IBM’s former IT services group plans to separate its China business

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IBM’s former IT services unit is planning to split off its China business in the latest sign of how geopolitical tensions and Chinese data laws are forcing multinationals to rethink their global footprint.

US-based Kyndryl, which was spun out of IBM in 2021 and says it is the world’s largest provider of IT infrastructure services by revenue, has told some employees about the decision to split, according to three people with knowledge of the matter.

It has not set out details of when it will take effect or who will control the China entity, the people said. One added that the move would affect roughly 6,000 staff in Hong Kong and mainland China.

Kyndryl is listed in New York and has partnerships with Microsoft, Google Cloud and Amazon Web Services. The company, which owns data centre space and advises companies on storing and managing their data, accounted for more than a quarter of IBM’s revenues before it was spun off.

Kyndryl has been caught up in the fallout from US-China tensions in both countries. Chinese customers have cut back on the use of foreign companies to help manage their IT infrastructure, while some US customers have asked for its China-based employees to not work on their US projects or to be closely scrutinised, particularly in AI-related businesses, the people added.

The company has “been finding it very hard to [operate] as a US corporate in the data and technology space in China”, one of the people said. “It makes you wonder which other big tech companies are going to have to follow the same route.”

The company, which made $17bn in revenues in the year to March, has concluded that its China unit might win more business as an independent entity, one of the people said.

Kyndryl does not break down its China revenues, but a 2021 filing said 12 per cent of its gross profit came from the Asia-Pacific region excluding Japan in the year to December 2020. It has about 90,000 employees in total.

The company declined to comment. 

The separation plan comes as global companies step up efforts to decouple their China data after Beijing put into effect an expanded anti-espionage law in July that covers the international sharing of information deemed to be sensitive.

Western companies are increasingly making plans to insulate their China operations from mounting geopolitical tensions. Some are considering selling their businesses in the country, while others are cutting back on planned investment or making sure their China operations serve only the domestic market.

The Anglo-Swedish drugmaker AstraZeneca has drawn up plans to split off its China business and list it separately as a way to shelter the company from the worsening relationship between China and the west.

Venture capital firms Sequoia Capital and GGV have also said they will spin off their units in the country.

IBM built the IT services business in the 1990s as a bet that maintaining and sometimes running IT systems for companies would open up a new stream of revenue and help it sell more computers.

Kyndryl’s shares have fallen from a high of $40.75 immediately after its listing in November 2021 to now trade at about $15, though they have risen 70 per cent in the past year.

The company “was saddled in the spin-off” with some lossmaking accounts and is “doing well” at repricing these and increasing margins, said James Friedman, an analyst at SIG who covers the company.